Newspapers as non-profits? Tax savings but some big downsides

Given the fact that many newspapers seem headed toward nonprofit status anyway, it’s perhaps not surprising that someone would try to make it official.

Legislation introduced this week by Sen. Ben Cardin of Maryland would enable newspapers to establish themselves as tax-exempt nonprofits and qualify for significant expense savings courtesy of Uncle Sam. Under the Cardin measure, they wouldn’t have to pay income taxes on income derived from advertising sales. That’s a big difference from existing IRS regulations, which customarily extract federal income taxes on advertising revenue derived by nonprofits. (There are a number of exceptions to this, including one that allows student publications to escape advertising-related income taxes.)

While Cardin’s legislation probably qualifies as a longshot, at least anytime soon, it kicks into play an interesting public policy question as newspapers increasingly head to bankruptcy court or worse: Is there a role for government here that would help protect citizens’ news and information needs?

Organized as a 501(c)(3), a tax-exempt newspaper would also be able to receive tax-deductible donations and hassle-free contributions from foundations. That sets up the possibility of a family or community group running the hometown paper as a non-profit, and acquiring some running room by elimianting tax expenses while diversifying revenue sources.

“That could be significant for some struggling family-owned newspaper that might want to convert it into a not-for-profit,” said George Rahdert, lawyer for the Times Publishing Co., of St. Petersburg, Fla.  While the St. Pete Times is a for-profit company (and thus avoids no taxes), it’s owned by the non-profit Poynter Institute.

But as Rahdert points out, a move to tax-exempt status would come at a huge cost. It would subject the newspaper to IRS regulations that prohibit statements favoring one political candidate over another. Editorial endorsements would clearly run afoul, but so might columns and even straight news coverage.

“I just don’t think my newspaper client wants to be in a situation where they can’t endorse candidates for public office, and some minion at the IRS has the ability to scour news coverage to determine if it’s crossed the line,” said Rahdert. The legislation could address this question by ordering the IRS to keep its hands off news coverage. But that would run into a huge definitional problem of determining what constitutes news coverage and what doesn’t.

There’s another problem that might be just as formidable. Conversion of a for-profit newspaper to non-profit status would likely involve payment of recapture taxes on the value of the assets involved. And in the instance of severely depressed newspaper assets, the taxes would be based on their highest value — even if that means their liquidation value.

But if Sam Zell can figure out how to run a billion-dollar company and pay no taxes, can’t someone figure out a way to do that with a non-profit?

UPDATE: Many interesting posts on this topic. Nieman Lab notes that the legislation applies only to ink-on-paper operations, not to the growing online-only crowd. My guess is most reaction has been strongly negative — such as this Buzz Machine post from Jeff Jarvis, who argues that government action only delays inevitable innovation. Others, like Poynter’s Rick Edmonds and the Philadelphia Inquirer’s Dick Pohlman, say Cardin’s legislation is more like a conversation starter that could produce alternative ideas for government action.

One note: Many folks are missing a point about how newspapers would be barred from prescribing political action in their news columns as non-profits. It’s not Cardin’s bill that would do this; it’s longstanding IRS rules. They’re the same ones that prevent preachers (wink, wink) from endorsing candidates from the pulpit. (“Prevent” as in educational and religious non-profits risk losing tax-exempt status if they engage in politicking. In real life that rarely happens but the threat is real.)